Did Hedge Funds Make The Right Call On Lumentum Holdings Inc (LITE) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Lumentum Holdings Inc (NASDAQ:LITE) based on that data and determine whether they were really smart about the stock.

Lumentum Holdings Inc (NASDAQ:LITE) investors should be aware of a decrease in activity from the world’s largest hedge funds recently. LITE was in 34 hedge funds’ portfolios at the end of the first quarter of 2020. There were 37 hedge funds in our database with LITE holdings at the end of the previous quarter. Our calculations also showed that LITE isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the recent hedge fund action encompassing Lumentum Holdings Inc (NASDAQ:LITE).

What have hedge funds been doing with Lumentum Holdings Inc (NASDAQ:LITE)?

At the end of the first quarter, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in LITE over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is LITE A Good Stock To Buy?

The largest stake in Lumentum Holdings Inc (NASDAQ:LITE) was held by Renaissance Technologies, which reported holding $163.4 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $75.2 million position. Other investors bullish on the company included Polar Capital, Matrix Capital Management, and Holocene Advisors. In terms of the portfolio weights assigned to each position AlphaOne Capital Partners allocated the biggest weight to Lumentum Holdings Inc (NASDAQ:LITE), around 7.98% of its 13F portfolio. Divisar Capital is also relatively very bullish on the stock, earmarking 4.65 percent of its 13F equity portfolio to LITE.

Seeing as Lumentum Holdings Inc (NASDAQ:LITE) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of funds who sold off their full holdings heading into Q4. Interestingly, John Hurley’s Cavalry Asset Management dropped the biggest position of all the hedgies tracked by Insider Monkey, comprising close to $24.9 million in stock, and Michael Rockefeller and KarláKroeker’s Woodline Partners was right behind this move, as the fund dumped about $22 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Lumentum Holdings Inc (NASDAQ:LITE). These stocks are Dolby Laboratories, Inc. (NYSE:DLB), Bausch Health Companies (NYSE:BHC), Mohawk Industries, Inc. (NYSE:MHK), and Ally Financial Inc (NYSE:ALLY). This group of stocks’ market values match LITE’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DLB 29 374056 -2
BHC 35 1566790 4
MHK 36 585591 -4
ALLY 45 931554 -9
Average 36.25 864498 -2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $864 million. That figure was $488 million in LITE’s case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Dolby Laboratories, Inc. (NYSE:DLB) is the least popular one with only 29 bullish hedge fund positions. Lumentum Holdings Inc (NASDAQ:LITE) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately LITE wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); LITE investors were disappointed as the stock returned 10.5% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.